There has been an unremitting focus on benchmarking by many sourcing professionals for a number of years, with a spotlight on the necessity to include a clear benchmarking clause in any contract.
Yet understanding of benchmarking, it’s application and value is still largely unappreciated.
A benchmarking clause will typically include wording to either allow the buying Party to conduct market comparisons or require the Supplier to do so at intermittent intervals.
Why should we include benchmarking clauses?
Though typically perceived as a more beneficial for the buying organisation, benchmarking can also be advantageous to the Supplier by highlighting how competitive their pricing is. Sciencedirect.com details an additional benefit to the Supplier in gaining a better understanding of the customer wishes and expectations. By identifying areas for improvement, could allow suppliers to rectify service gaps and increase their customer value. It may be the supplier simply hadn’t been aware of market pressures or changes prior to a benchmarking exercise.
With the fast pace in which we see technological advancements, the volatile political landscape and precarious economic environment these clauses ensure the right service/ product at the right price is being provided. What might be the best option on the day on contract signatory, may not be three years later.
The buying organisation may also utilise the benchmarking to avoid the costly process of re-tendering at the end of the contract term and evoke the benchmarking clause to instead simply renew with the incumbent, safe in the knowledge they remain competitive, and the solution is fit for purpose.
Evoking a Benchmarking Clause
All too often a procurement team will spend time and effort negotiating a robust benchmarking clause only for the contract manager to neglect to take advantage of the process, often due to unfamiliarity of the process or value it can provide.
The process itself can be broken down into the following steps:
- Determine the scope
As with any project, defining what the aim of the exercise is will be crucial in determining the data set. It may also be sagacious to review the clause at this stage, to identify roles and responsibilities of both Parties, the defined metrics, if any, and to ensure no breach in frequency.
- Determine the Benchmarking Partners
In line with step 1, once the aims of the project have been defined, the comparators should then be decided. Choosing the right peers to compare against is critical to ensure a fair and valuable benchmark is achieved. It would be a poor use of resource to compare apples with pears! You need to ensure you’ve got a like-for-like comparison, and preferably a wide range of data sources to gain the most value.
- Determine Data and Data Collection Methodologies
Some constraints in this step might be determined by the resource and data available. You may wish to partner with external benchmarking experts who will be dedicated wholly to the process and can advise on which data will provide the best return on investment.
- Data Gathering
There may be a variety or limited number of locations from which you can obtain base data. Though not exhaustive, sources may include industry reports, google searches, previous similar exercises or partnering with competitors to share information for mutual benefits. Again, the key is to ensure commonality for best results.
Conducting the analysis is essential to the success of the benchmarking exercise and must be performed without bias. It is important to keep focus on the goals identified in step 1 to avoid the pitfall of over-analysis, which can lead to scope creep and unnecessary use of resource. As soon as results have been verified, present the findings in a factual manner, using results as a basis to strengthen the Buyer- Supplier relationship as opposed to employing the results to win gains at the other Parties expense.
- Action Plan
Once the results have been presented, work together to agree an action plan for continuous improvement and to address any identified opportunities. Benchmarking can be an excellent tool for driving innovation and creativity, benefits of which should be realised by both Parties. Assign action ‘owners’ to help drive the changes and to ensure momentum is maintained.
Monthly or quarterly governance meetings can be used to monitor progress and preserve impetus. It’s important to consider benchmarking as an on-going commitment, not a silo exercise to maximise the gains.
Peru Consulting has delivered vast savings for clients through our expertise in benchmarking , fostering a strong methodology for maximising the value that can be obtained from a benchmarking exercise whilst maintaining and improving the integrity of the relationship. We negotiate with confidence, capitalising on market expertise and adopting innovation for our clients, but above all promoting a win-win outcome.
As we see the emergence of longer contract terms, rapid changes in the economic and political landscapes and disruptions across supply chains, the need for benchmarking has never been as important as it is today.